Submitted By:

Name: Areeba Khaliq

Roll No: LCM-4097
Class: BBA (V) Morn.
Subject: Money and Banking

Submitted To:
Miss Maimona Sajid

Submission Date:
1 December 2022
 The Cambridge Version of Quantity Theory of money

Explanation to the Theory:

The Cambridge economists—like Alfred Marshall and A. C. Pigou—presented an alternative to
Fisher’s version of Quantity Theory.

The Cambridge economists, being dissatisfied with Fisher’s analysis, explained this theory in a
new way. If Fisher’s ideology is very popular in America, there is more recognition for
Cambridge ideology in European countries.

 How the changes in money supply affect the price level can be easily answered by
Cambridge approach of Quantity theory of money.
This approach also demonstrated the proportional relationship between quantity of money and
price level.
The Cambridge equation is Md=kPY
Money demand (Md) is assumed to be a proportion (k) of nominal income, the price level
(P) times the level of real income(y).

 In equilibrium
M=Md=kPȲ

The exogenous supply of money must equal the quantity of money demanded.
 k is fixed in short run and real output (Ȳ) is determined by supply condition.

Based on two conditions i.e. Stable k and supply determined real output (Ȳ), Cambridge
equation also reduces to a proportional relationship between price level and money supply.
(As in fisherman approach, the quantity of money determines the price level).

 The formal equivalence of Cambridge equation and fisher’s version of equation of

changes can be seen in rewriting equilibrium equation (i.e. M =Md = kPȲ).
1
M. k = PȲ
By comparing fisher’s
1
equation i.e. MV̄=PȲ, we find that both equation are equivalent with V equals to .
k
For example:
If individuals wish to hold an amount equal to one- fourth of the nominal income in the form
of money, the number of times the average dollar is used in income transaction will be 4.
 Although both the fisher version and Cambridge version of quantity theory are formally
equivalent.
 The Cambridge focus was on the quantity theory as the theory of the demand for money.
 An excess supply of money led to increased demand for commodities and upward pressure
on the price level.